An EU action plan to help Europe’s struggling steel industry to be announced on Wednesday is expected to include a proposal to levy punitive tariffs on subsidised Chinese imports, a move the UK government will oppose.

Axel Eggert, director general of the European Steel Association (Eurofer), said the situation for Europe’s steel industry was now critical. The UK is one of the hardest-hit countries, he added, with the strong pound and relatively high energy prices raising the cost of British steel.

The industry in Europe blames the crisis on state-owned steel companies in China – and to a lesser extent Russia and Belarus – that benefit from loans and subsidies that allow them to produce below cost. As a result, EU producers have not benefited from Europe’s rising demand for steel as the car industry and construction sectors rebound out of recession.

“You have an increase in EU steel demand and a drop in prices. This is not normal,” Eggert said. “This is a very clear sign of massive trade distortions.”

The European commission agrees. It estimates that China produces 325m tonnes of excess steel a year, more than double Europe’s annual production.

“The European steel industry is facing a number of serious challenges, fuelled by global overcapacity, a dramatic increase of exports and an unprecedented wave of unfair trading practices,” states the draft action plan seen by the Guardian.

The commission says it has passed “a record level of trade defence measures”, pointing to 37 cases in which extra tariffs have been charged on dumped goods. But it says more needs to be done.

Behind this show of unity, the EU countries are divided on how powerful Europe’s trade defences should be. The main point of contention is the lesser-duty rule, an arcane formula for calculating extra tariffs levied on goods produced below market prices.

Although not compulsory under World Trade Organisation guidelines, the EU has chosen to abide by the lesser-duty rule, which restricts punitive tariffs on dumped goods. For example, whereas the EU sets a tariff of up to 16% on dumped Chinese cold-rolled steel – a high-value product used to make car parts, household appliances and furniture – the US fixed duties at 266%.

Eggert contends that Britain’s position sets it apart from other countries.

“The UK often is closer to the US than the EU, but not in trade defence,” he said. He added that the US took a stronger line on enforcing fair trade, compared with Europe.

Steelworks have been handing out redundancy notices across Europe, as artificially cheap metal from China depresses prices across the world. Steelworkers at Port Talbot in Wales are to find out this week whether they are among the 750 to lose their jobs, after Tata Steel announced in January that it was cutting more than 1,000 jobs in the UK, which will bring the country’s steel job losses to more than 4,100 since last September.

The job cuts at Port Talbot have been mirrored across Europe, with more than 90,000 steel jobs having gone since 2009, a 22% reduction in the industry’s European workforce, according to Eurofer.

China’s excess production is also a headache for the country’s ruling Communist party, as the steel glut weighs on domestic prices at a time when the Chinese economy is slowing and demand for steel is falling. In January the government vowed to cut excess steel capacity by 100m-150m tonnes a year, but has not set a deadline. More recently it said it expects to lay off 500,000 workers from the sector.

The debate comes as the EU considers the politically sensitive issue of whether to grant market-economy status to China, a change that would make it harder for the EU to levy punitive tariffs.

This year, the Chinese ambassador to the EU, Yang Yanyi, told MEPs that China was already a market economy and deserved the status under the terms of its WTO accession in 2000. The commission is scheduled to make a recommendation by the end of the year, but EU member states have the final say.

Opponents counter that the EU has no obligation to upgrade China’s trading status at a time when the country continues to dump steel on world markets. “Don’t give market economy status to China until the country fulfils the criteria of a market economy,” said Eggert.